- Draw a diagram that illustrates the effect of the luxury tax on the yacht market.
Use your diagram to answer to answer the following questions.
- How does the tax cause yacht builders to lose their jobs (or go out of business)? As part of your answer, use your diagram to illustrate the impact of the tax on yacht builders that lose their jobs (or go out of business).
- How does the tax affect yacht builders that don’t lose their jobs (stay in business)? As part of your answer, use your diagram to illustrate the impact on yacht builders that don’t lose their jobs (stay in business).
- How does the tax affect yacht buyers? As part of your answer, use your diagram to illustrate the two ways that buyers of yachts are impacted by the tax.
- Why the tax has raised so little revenue? Hint: what is it about either supply or demand that has resulted in the tax generating very little tax revenue? As part of your answer, use your diagram to indicate the total tax revenue raised by the tax.
- Based on your answer to the previous question, would you expect this tax to create a lot of deadweight loss, or only a little deadweight loss? As part of your answer, indicate the deadweight loss from the tax on your diagram.
- Assuming that the author is correct that this “tax has contributed to the general devastation of the American boating industry”, explain why you think this is true (i.e., explain why you think the tax has been very damaging to yacht builders). Hint: What is it about either supply or demand for yachts that has made this tax so damaging to yacht builders?